1. (a) Prior approval and notice.

   1. (1) The prior written approval of the commissioner shall be required for the transactions specified in the Act, §4(d)(1).

   2. (2) The following transactions between a domestic insurer and any person in its holding company system may not be entered into unless the insurer has notified the commissioner in writing of its intention to enter into any such transaction at least 30 days prior thereto, or such shorter period as he may permit, and he has not disapproved it within such period:

      1. (A) sales, purchases, exchanges, loans or extensions of credit, or investments, involving either more than one-half of 1.0% but less than 5.0% of the insurer's admitted assets, or more than 5.0% but less than 25% of the insurer's surplus, whichever is the lesser, as of the 31st day of December next preceding, and transactions in the securities of affiliates other than a subsidiary of an insurer, which are not subject to paragraph (1) of this subsection;
      2. (B) reinsurance treaties or agreements or modifications to those treaties or agreements, including those agreements that may require as consideration the transfer of assets from an insurer to a nonaffiliate, if an agreement or understanding exists between the insurer and nonaffiliate that any portion of the assets will be transferred to one or more affiliates of the insurer;
      3. (C) any contract, agreement, or arrangement for the furnishing or receiving of services or facilities on a regular or systematic basis; or
      4. (D) management or service agreements, cost sharing agreements, rental or leasing agreements;
      5. (E) agreements to consolidate federal income tax returns, which agreements shall provide that a domestic insurer will be adequately indemnified in the event the Internal Revenue Service levies upon the insurance company's assets for unpaid taxes in excess of the amount paid under the agreement;
      6. (F) transactions with affiliated financial institutions, other than fully insured deposits; and
      7. (G) participation in an investment pool by a property and casualty insurer pursuant to the Insurance Code Article 2.10-5; and
      8. (H) any material transactions which the commissioner has determined after notice may adversely affect the interest of the insurer's policyholders or of the public.
   3. (3) A domestic insurer may not enter into transactions that are part of a plan or series of similar transactions with persons within the holding company system to avoid the statutory threshold amount and thus avoid review. If the commissioner determines that the transactions were entered into over any 12-month period for that purpose, the commissioner may consider the series of transactions with regard to their cumulative effect and may apply the applicable statutory thresholds or the commissioner may apply sanctions under the Code.
   4. (4) Nothing herein contained shall be deemed to authorize or permit any transactions which, in the case of a noncontrolled insurer, would be otherwise contrary to law.
   5. (5) The commissioner, in reviewing transactions hereunder, shall consider whether the transactions comply with the standards set forth in subsection (c) of this section and whether they may adversely affect the interest of policyholders. Any disapproval by the commissioner of any such transactions shall set forth the specific reasons for such disapproval.
   6. (6) The approval of any transaction under this subsection shall be deemed an amendment under §7.203(e) of this title (relating to Registration of Insurers) to an insurer's registration statement without further filing.
2. (b) Transactions. Requests for approval of transactions pursuant to subsection (a)(1) of this section and notices of proposed transactions pursuant to subsection (a)(2) of this section, shall be accompanied by descriptions of the essential features of such transactions which are reasonably adequate to permit proper evaluation thereof by the commissioner including the applicable filing fee provided for in §7.1301(d)(23) of this title (relating to Regulatory Fees). Such descriptions shall in all cases include at least the following: the nature and purpose of the transaction; the nature and amounts of any payments or transfers of assets between the parties; the identities of all parties to such transactions; whether any officers or directors of a party are pecuniarily interested therein, and copies of any proposed contracts, agreements, or memoranda of understanding between the parties relating to the transaction along with sufficient competent documentation evidencing compliance with the standards specified in the Act, §4(a), and evidencing that the transaction will not adversely affect the interest of policyholders. Proposed contracts, agreements, or memoranda of understanding shall provide for settlement within 90 days. No such request or notice shall be deemed filed with the commissioner until the date all such material has been provided.
3. (c) Transactions with affiliates and others. Material transactions by registered insurers with their holding companies, subsidiaries, or affiliates are subject to the standards specified in the Act, §4(a).

4. (d) Extraordinary dividends and other distributions.

   1. (1) No insurer subject to registration under §7.203(a) of this title (relating to Registration of Insurers) shall pay any extraordinary dividend or make any other extraordinary distribution to its shareholders until:

      1. (A) 30 days after the commissioner has received written notice in accordance with §7.212 of this title (relating to Form D) of the declaration thereof, including the applicable filing fee pursuant to §7.1301(d)(23) of this title, and the commissioner has not within such period disapproved such payment; or
      2. (B) the commissioner shall have approved such payment within such 30-day period. The written notice required under this paragraph shall be deemed filed with the commissioner only when all material sufficient to constitute a complete filing, including documentation to support each of the standards set forth in the Act, §4(b), and the payment of any required filing fee pursuant to §7.1301(d)(23) of this title have been provided.

   2. (2) For purposes of these sections an extraordinary dividend or distribution includes any dividend or distribution of cash or other property, whose fair market value together with that of other dividends or distributions made within the preceding 12 months exceeds the greater of:

      1. (A) 10% (20% if such insurer is a title insurer) of such insurer's surplus as regards policyholders as of the 31st day of December next preceding; or
      2. (B) the net gain from operations of such insurer, if such insurer is a life or title insurer, or the net income, if such insurer is not a life or title insurer, for the 12-month period ending the 31st day of December next preceding;
      3. (C) an extraordinary dividend or distribution shall not include pro rata distributions of any class of an insurer's own securities;
      4. (D) in determining the 12-month cumulative amount for dividends or distributions, the calculation shall be based on the declaration date(s) of such dividends or distributions.
   3. (3) Notwithstanding any other provision of law, an insurer may declare an extraordinary dividend or distribution under the conditions specified in the Act, §4(c)(3).
5. (e) Adequacy of surplus. For the purposes of these sections, in determining whether an insurer's surplus as regards policyholders is reasonable in relation to the insurer's outstanding liabilities and adequate to its financial needs, the factors specified in the Act, §4(b), among others, shall be considered.

Source Note:The provisions of this §7.204 adopted to be effective January 1, 1976; amended to be effective November 30, 1984, 9 TexReg 5926; amended to be effective April 29, 1988, 13 TexReg 1761; amended to be effective April 13, 1992, 17 TexReg 2273; amended to be effective July 14, 1994, 19 TexReg 5098; amended to be effective May 15, 1996, 21 TexReg 3798; amended to be effective May 5, 2002, 27 TexReg 3559.